Why the U.S. Government Can’t Be Downsized

The Republican vow to significantly reduce the size of government is a foolish pipe dream, Larry Summers says, not because of liberal policy aspirations but because of structural economic realities.

At a lunch on Wednesday, Summers, a former Treasury secretary and a leading Democratic economic-policy thinker, explained the substantive as well as political impracticalities of cutting entitlements and defense spending in the years ahead.

“If we want to maintain traditional American values, government will need to be significantly larger,” Summers declared at the event, hosted by the liberal Center on Budget and Policy Priorities.

What’s needed now, he said, is tax reform modeled on the law enacted in 1986 that improves the tax code and doesn’t lose money. What we can’t afford, the economist declared, is a tax cut like the one in 1981 that drained billions of dollars from the Treasury. As the plans of the Trump administration and congressional Republicans unfold, it becomes clearer that they are closer to the 1981 approach.

Summers, who was director of the National Economic Council under President Barack Obama, denigrated those efforts and summarized four economic realities that undercut the possibility of downsizing government:

The aging population. As people live longer, government programs have more claims on them, so if entitlements are maintained at current levels or even cut slightly, government spending will increase.

The unsustainable, dramatic rise in inequality. A role of government, he noted, is to address and “ameliorate” inequality.

Changes in structural pricing that disproportionately affect government. As an example, Summers said, pegging the 1983 consumer price index at $100, the cost of a television today would $6, while the cost of a day in the hospital, or a year in college, would be $600. The price of televisions, he noted, doesn’t much affect government spending; hospital prices and college costs do.

Rising national security costs. Summers noted that the three major countries that could be seen as potential American adversaries — China, Russia and Iran — are all increasing military spending at rapid rates. It is unrealistic to think that won’t affect American policy, despite the wishes of many political liberals who hoped government could raise revenue from defense cuts. “To view the Pentagon as a cash cow is a grave and serious mistake,” Summers said.

He criticized the emerging Republican tax plans as counterproductive for the economy and for long-term government revenues. Most Republicans, although giving lip service to major reforms, are focused on a huge tax cut for corporations and higher-income individuals. Noting the relatively low cost of capital, with low interest rates, and the need to bolster revenues in the years ahead, he said: “This is not the moment for net tax cuts.”

Summers argued that a real tax reform, like the 1986 plan worked out between Republican President Ronald Reagan and a politically divided Congress, would be beneficial. Rates could be cut by slashing tax preferences like the carried interest enjoyed by some private-equity and hedge-fund executives and the huge real-estate tax breaks, among others, and by devoting more resources to tax compliance and enforcement.

The economist didn’t seem averse to a modest cut in the corporate tax rate but was appalled by Republican arguments to cut this top rate from 35 percent to as low as 15 percent.

“That might be a good thing for my finances, but it would be outrageous public policy,” said Summers, who is in demand as a speaker and consultant.

He ridiculed the populist-sounding arguments of Trump adviser Gary Cohn and Treasury Secretary Steven Mnuchin, who say, for example, that tax cuts would help firemen since a resulting surge in stocks would help their retirement plans. Most firemen have defined-benefit pension plans that wouldn’t be affected, Summers noted.

At the lunch, the Center on Budget and Policy Priorities released its own projections for federal spending and revenues. By 2035, with reasonably modest assumptions, spending would increase to 23.5 percent of the gross domestic product from 20.9 percent. Thus, the center contends, it will be necessary for revenue growth to keep pace — or the result would be a massive increase in deficits and debt.

Lawrence H. Summers is the Charles W. Eliot University Professor and President Emeritus at Harvard University. He served as the 71st Secretary of the Treasury for President Clinton and the Director of the National Economic Council for President Obama.